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Iron Ore Giant Says Miners Have Shut Gates on New Supply

(Bloomberg) -- Global iron ore miners have turned off the tap on adding new production capacity to feed China’s steel mills as the world’s largest customer is already awash with supplies, according to Fortescue Metals Group Ltd.

“The reality is that most of the producers, ourselves included, are not actually looking to grow supply of iron ore into China,” Fortescue Chief Executive Officer Elizabeth Gaines said in a Bloomberg TV interview. “The market is very well supplied and the build-up of inventory at the ports is an indication of that. Nobody is looking at adding new supply into the market.”

Australia, the world’s largest iron ore exporter, delivered a mixed message Monday on the outlook, raising near-term price forecasts, but combined that revision with a more somber message that China’s gargantuan imports are set to level off as steel production eases in the coming years.

“We are seeing that demand is still very strong,” Gaines said Monday. “Our view is that steel production will remain at roughly the same levels. It will stay relatively flat.”

Gaines was speaking on the sidelines of this week’s Boao Forum for Asia in Hainan, the local equivalent of Davos. Any periods of prolonged trade wars aren’t conducive to long-term world economic growth, she said, anticipating some level of protectionist tariffs may be introduced in the context of the ongoing spat between the U.S. and China.

“There’s still a lot of ongoing dialogue,” she said. “There is an understanding that we don’t want to see a period of prolonged trade wars. I do think there is a broader sense there should be a common sense approach to world trade.”

The global iron market has seen a flight to quality over the past two years, with mills in China favoring cargoes of higher-iron content material that’s more efficient and less polluting. The price spread has been narrowing and this trend will continue, according to Fortescue.

“We’ve seen one of the drivers for the spread between the higher-grade and the lower-grade ores has been the high profitability of the Chinese steel mills,” Gaines said. “As that profitability comes under pressure” they will chase the lower-grade ore, she said.

Spot 62 percent content material in north China last traded Monday at $63.80 a dry metric ton, according to Mysteel.com. That compares with $51.50 for 58 percent ore, and over $81.75 for the 65 percent grade. Fortescue produces material with an average of about 58 percent content, although it’s seeking to raise that figure.